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Currency

Pakistani rupee to remain stable, traders say

A trader counts Pakistani rupees next to a stack of US dollars. Photo: File
  • The local unit was stable for three trading sessions this week, according to traders.
  • The rupee is expected to trade between 164.10 and 164.40 per dollar.
  • Analysts say the rupee has been polarized with developments pulling it back and forth.

KARACHI: The Pakistani rupee is expected to remain stable against the US dollar next week in the market, as demand and supply of the US dollar will almost match, sources said.

According to a report published in The news, the local unit remained stable over the three trading sessions this week.

“We expect the rupee to remain stable in the coming days with remittance and export flows balancing out with demand from importers,” said a forex trader at a commercial bank.

“There are about $ 2.8 billion in entries from the International Monetary Fund on Monday due to its new global allocation of Special Drawing Rights, this would help increase foreign exchange reserves and support the rupee,” he said. -he adds.

The rupee is expected to trade between 164.10 and 164.40 per dollar, he said. Analysts said the rupee was polarized with developments pulling it back and forth.

On the positive side, in addition to expected IMF inflows, most commodity prices fell in the outgoing week, with oil prices declining by around 6% on average and the current account deficit showing an improvement in the past. ‘month over month, reaching $ 773 million in July, up from $ 1.6 billion the month before.

In addition, the real effective exchange rate (REER) was slightly better in July than in the previous month. The REER depreciated to 99.4 in July from 99.8 in June.

“On the negative side, analysts are anticipating a Fed rate hike. A rise in US interest rates will reverse flows to US markets, thereby weakening almost all currencies, including emerging markets. Last week we saw the dollar index hit a nine-and-a-half-month high, ”a Tresmark analyst said in a client note on Saturday.

Second, logistical problems in the commercial sector may disrupt shipments. And finally, the uncertainty surrounding the Afghan will have a negative impact on the rupee, he said.

As for Afghanistan, the low level of foreign exchange reserves and the need for commodities will lead to active cross-border smuggling of commodities as well as hard currencies, he added.

“At the moment the factors are higher for a weaker rupee, but a recent depreciation of 7.50% in the past 3 months can be seen as sufficient by the market.”

Taliban control over Afghanistan could have serious implications for Pakistan on the geopolitical and security front; the direct economic impact appears to be insignificant; however, the deterioration of ties with the United States may affect the IMF’s program, analysts say.

The Pakistani 10-year US dollar bond saw its yield rise 25 basis points on Monday as investors shed debt.


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Currency

Currency Converter Application Market Quality and Quantity Analysis | SmartWho, XE, ExtraAndroary

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Commercial banks

Tackling High Commercial Bank Lending Rates – Chairman of the BoG

President Nana Addo Dankwa Akufo-Addo urged the Bank of Ghana (BoG) to close the gap between its monetary policy rate and commercial bank lending rates to bolster the country’s rapid growth.

He said it was not fair that the central bank’s monetary policy rate stood at 13.5% while commercial banks lent to the private sector at 21% or more, adding that he was stifling the competitiveness of the sector, which was the engine of growth of the economy.

“To question the issue of high interest rates in Ghana and how the problem needs to be resolved to improve the competitiveness of the private sector in the country… I think the Bank of Ghana is best placed to lead this thought process and action.

“This is a gap that we must close if we are to realize the vision of a Ghana with a globally competitive economy,” he said when swearing in to the 13 board members. Newly constituted Directors of the Central Bank at Jubilee House, Accra. , Friday.

The board, chaired by BoG Governor Dr Ernest Addison, includes Dr Maxwell Opoku-Afari, First Deputy Governor, Miss Elsie Addo Awadzi, Second Deputy Governor, Charles Kofi Adu Boahen, Minister of State, Ministry of Finance, and Prof. Eric Osei Asibey.

The others are Dr. Kwame Owusu- Nyantekyi, Dr. Samuel Nii-Noi Ashong, Mr. Jude Kofi Bucknor, Mr. Joseph Blignam Alhassan, Mr. Andrew Adinorte Boye-Doe, Ms. Angela Kyerematen-Jimoh, Ms. Comfort Ocran and Ms. Regina Ohene-Darko Adutwum.

The president told the board that the Central Bank has distinguished itself over the past four years and performed its duties impeccably, has proven to be a good banker for the government and a safe guardian. of the nation’s money.

He was encouraged by the many corporate governance measures that have been put in place by the BoG to mitigate future bank failures and “ensure we have a strong banking sector that can drive the government’s transformation agenda” .

President Akufo-Addo also welcomed the recent policy measures introduced by the BoG, saying they were in line with the overall goal of moving Ghana to a situation beyond aid.

He noted that the BoG’s recently introduced national gold purchase initiative has been a game-changer that would help transform the country’s domestic gold production value chain, and “will allow us to add value. value to our gold and establish transparency in the small-scale gold mining industry. in Ghana.

The President praised the central bank’s leading role in the digitization of the economy and said that the recent announcement of the central bank-backed pilot digital currency, the EDC, which would completely transform the architecture of Ghana’s payment systems would deepen financial inclusion and improve access to credit for small and medium enterprises.

He also praised the bank for its initiative and partnership with Singapore regulators and Ghana’s Ministry of Finance to develop a network of digital platforms serving as a global public infrastructure to boost SME growth in both countries.

“All of these have re-established the Bank of Ghana as an institution of excellence, reflecting the international recognition of the bank,” he said.

The President instructed the Board of Directors to draw on the vast experience of the members to ensure the formulation of the policies necessary for the achievement of the Bank’s objectives.

“I count on the Board of Directors with its diversity of experiences, talents and skills to support the bank’s agenda and help formulate the policies necessary to achieve its objectives. It’s an accusation I’m sure you would keep, ”he said.

In his remarks, Dr Addison pledged that the board would pursue prudent policies to consolidate the gains made over the past four years.

“Given the rich and diverse experience of the board, there is no doubt in my mind that together we can build on the solid foundations that were laid by our predecessors and take this institution to even greater heights.” , did he declare.


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Banking system

Columbia Banking System (COLB) gains 1.95% on high volume on August 20

Columbia Banking System, Inc. (NASDAQ: COLB) gained to close at $ 36.52 on Friday after gaining $ 0.7 (1.95%) on volume of 266,476 shares. The stock ranged from a high of $ 36.59 to a low of $ 35.61, while Columbia Banking System’s market cap now stands at $ 2,620,939,130.

About Columbia Banking System, Inc.

Based in Tacoma, Wash., Columbia Banking System, Inc. is the holding company for Columbia Bank, a full-service commercial bank licensed by the State of Washington with operations throughout Washington, Oregon and Idaho. The bank has been named one of the “Best Places to Work in Washington” more than 10 times by the Puget Sound Business Journal and was recently ranked # 1 for customer satisfaction with retail banking in the region. Northwest by JD Power in the 2020 US Retail Banking Satisfaction Survey. Columbia was named the Northwest’s # 1 bank on the Forbes 2020 list of “America’s Best Banks” marking nearly 10 consecutive years on the publication’s list of top financial institutions. More information about Columbia can be found on its website at www.columbiabank.com. Columbia Bank received the highest score in the Northwest region of the JD Power 2020 US Retail Bank Satisfaction Survey for customer satisfaction with their own retail bank.

Visit the Columbia Banking System, Inc. profile for more information.

About the Nasdaq Stock Market

The Nasdaq Stock Market is a global leader in trading data and services, as well as the listing of stocks and options. The Nasdaq is the world’s largest stock exchange for options volume and is home to the five largest US companies – Apple, Microsoft, Amazon, Alphabet and Facebook.

For more information on Columbia Banking System, Inc. and to keep up with the latest company updates, you can visit the company profile page here: Columbia Banking System, Inc.’s Profile. For more information on the financial markets, be sure to visit Equities News. Also, don’t forget to sign up for the Daily Fix to get the best stories delivered to your inbox 5 days a week.

Sources: The chart is provided by TradingView based on 15 minute lag prices. All other data is provided by IEX Cloud as of 8:05 p.m. ET on the day of publication.

DISCLOSURE:
The views and opinions expressed in this article are those of the authors and do not represent the views of equities.com. Readers should not take the author’s statements as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please visit: http://www.equities.com/disclaimer


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Banking system

Expert economists: Myanmar’s military management of banking system is catastrophic and incompetent

Members of the Burmese military received doses of a Covid-19 vaccine imported from India without being informed that it had not yet been approved, according to military sources.

The military’s covert vaccination program, which used the Covaxin vaccine produced by Indian pharmaceutical company Bharat Biotech, began in January and continued for three months, the sources told Myanmar Now.

Those who received the vaccine were not told it was still in phase three of clinical trials at the time, according to several people who participated in the program.

“They said they were going to vaccinate us, then check our immunity two weeks after the jab to see if it had increased. So you could say it was a test, ”said an officer who was in the first group of test subjects.

The officer, who was stationed at a military hospital in Mingaladon Municipality in Yangon, told Myanmar Now that 15 soldiers, including himself, had blood drawn three times after each of the two shots they fired. received.

He said the program was then expanded to include more military personnel after reviewing the results of the first 15 subjects.

“I thought they were taking blood from everyone. But later we found out it was just us. We even joked that we were being used like lab rats, ”he said.

“It’s infuriating, but there’s nothing you can do about it because it’s the army.”

Involuntary volunteers

Another person who was to participate in the program as a test subject said it was carried out under the orders of senior officers.

“They wanted a study population to serve as a register of people who received the injections, maybe 100,000 people or so,” said a doctor at another military hospital in Yangon. “To be honest, I think it’s sad that we were used as human guinea pigs in this way.”

The doctor, who asked not to be identified, said two teams were involved in collecting data from those who had received the vaccine.

“There was one group of people who followed our body’s reaction to the vaccine – how many people developed a fever, how many became nauseous – and another who tested how much the amount of antibodies in our blood increased afterwards. vaccination, ”he said. noted.

The wife of a naval officer told Myanmar Now that her husband, who received the first injection in mid-February and the second a month later, finally learned that the vaccine he received was Covaxin, not the approved Covishield vaccine, also produced in India, which was used in the national immunization program launched by Myanmar’s civilian government days before it was ousted from power on February 1.

She added that although her husband was able to obtain this information because of his rank, it was unlikely that ordinary soldiers included in the army’s vaccination program would be aware of this fact.

Bharat Biotech began Phase 3 trials for Covaxin last November, but by early January it still hadn’t made much progress due to a lack of volunteers ready to try the vaccine.

The company, which has denied conducting clinical trials outside India, told Myanmar Now by email that it sent 55 vials of the vaccine to Myanmar in January, but added that it was ‘a common practice when dealing with potential buyers.

However, on February 11, another 200,000 doses of Covaxin were Shipped in Myanmar as part of the Indian government’s Vaccine Maitri diplomatic program, under which 1.5 million doses of Covishield had already been dispatched on January 22.

On January 27, Indian online media Mint reported that Bharat Biotech was seeking approval from the governments of Myanmar and Bangladesh to test Covaxin in both countries.

An official from the Indian Council for Medical Research (ICMR), a partner of Bharat Biotech in the production of the vaccine, is quoted in the article as saying that such trials are part of the normal procedure followed by countries seeking to procure vaccines. The article also noted, however, that Bharat Biotech declined to comment on the subject of foreign testing.

Unlike Covishield, which is manufactured by the Serum Institute of India under license from the multinational pharmaceutical and biotechnology company AstraZeneca, Covaxin was developed in India. By the end of June, it had received emergency use authorization in 16 countries, according to local media. reports.

The World Health Organization (WHO), which received a request for inclusion of Covaxin on its emergency use list in early July, has not yet completed its review of the data submitted.

Denial of the trial

Most government officials, including those in the former civilian government, deny knowledge of the military’s vaccine testing program.

Dr Win Myat Aye, who headed the Ministry of Social Welfare, Relief and Resettlement under the ousted government of the National League for Democracy, and Dr Zaw Wai Soe, who played a key role in efforts to this government’s response to Covid-19, and who is now Minister of Health in the shadow government of national unity, both said they were not aware of any Covaxin-related programs that may have existed prior to the Rebellion.

In late January, shortly before the military takeover, Health Ministry spokesman Dr Khin Khin Gyi told local outlet Eleven News that the government did not intend to test Covaxin in Myanmar.

In an interview with Myanmar Now on July 15, Dr Htay Htay Tin, deputy director of the National Health Laboratory and another leading figure in efforts to contain Covid-19, also said that no trials of Covaxin had been conducted. in Myanmar.

Less than a week later, Dr Khin Zaw, director of the Food and Drug Administration, said civilians were injected with Covaxin in April.

“We have already administered Covaxin vaccines in Myanmar. We have given all the vaccines given to civilians, ”he told Myanmar Now on July 21, adding that the vaccines had been approved by the FDA for use, not for testing.

He added that the public health department may have conducted trials using data collected from those who received the vaccine, but claimed it had already been proven to be safe and effective at the time. where it was administered.

Dr Than Naing Soe, one of the directors of the public health department, said the department has not conducted trials on Covaxin or approved research on the vaccine, although there have been discussions on this subject.

“We refused to do the tests here. We don’t want our people to suffer just because another country wants to test their vaccine, ”said Dr Than Naing Soe, who is also a spokesperson for the Ministry of Health under the current regime.

“Approve whatever is available”

While the junta has not admitted having carried out clinical trials on soldiers, senior regime officials have made no secret of their desire to use vaccines not approved by the WHO to fight Covid-19.

In February, coup leader Senior General Min Aung Hlaing mentioned Covaxin as one of the vaccines the regime planned to purchase, along with others from China and Russia.

In an interview with China’s state-run Xinhua News Agency in April, the Deputy Minister of Information of the Military Council, General Zaw Min Tun, also counted Covaxin among the vaccines for use in Myanmar.

As early as June, some companies claimed to have already received FDA clearance to import Covaxin. On June 23, a local pharmaceutical company called SML announced on Facebook that it was accepting pre-orders for the vaccine.

Dr Khin Zaw, director of the FDA, said SML was given the green light because it submitted its application with Bharat Biotech’s approval.

“If we were to deny anything that is still pending WHO approval, we wouldn’t be able to approve most drugs here. WHO-approved vaccines are almost impossible to get here at the moment, so we decided to approve whatever was available, ”he said.

Since the start of the third wave of the pandemic at the end of June, the junta’s health authorities have administered the Chinese Sinopharm and Sinovac vaccines to people over 65 years of age. These vaccines offer 51 to 79% protection against Covid-19.

The Chinese government donated 2.5 million doses of Sinopharm vaccine to Myanmar and the regime purchased 2 million doses of Sinovac.

Those familiar with the Covaxin trial program say the Indian vaccine has been shown to be largely ineffective in preventing infection.

The naval officer’s wife said almost everyone in her husband’s unit contracted the disease despite being vaccinated with Covaxin.

The Mingaladon Military Hospital officer said two-thirds of those who participated in the Covaxin trials were infected soon after the start of the third wave. Although they were vaccinated, many developed symptoms of Covid-19, he said.

“I first had a fever, then I lost my sense of smell. After that I got nauseous and stopped eating, ”he said, describing the first common signs of infection.

“I am not even going to test myself for Covid-19. I have treated Covid-19 patients in my ward, so I’m pretty sure I already have it, ”he added.

Myanmar Now is an independent news service providing free, accurate and unbiased news to the people of Myanmar in Burmese and English.


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Commercial banks

Exempt the public sector and commercial banks from the deposit insurance regime: AIBEA

Before Lok Sabha passes the deposit insurance bill, the Bank Employees Association of India (AIBEA) urged Finance Minister Nirmala Sitharaman to exempt banks in the sector from his jurisdiction. public and / or commercial banks, which are covered by Article 45. of the Law on Banking Regulation.

Commercial banks pay around 12,000 crore in premiums to the Deposit Insurance and Credit Guarantee Corporation (DICGC), which is an unwarranted expense as it would otherwise have benefited banks, said CH Venkatachalam, general secretary of the ‘AIBEA, in a letter. to the Minister of Finance on Sunday.

Overhaul of deposit insurance

Venkatachalam pointed out that Section 45 allows the government and the RBI to merge any bank with another bank to avoid closure and loss of customer deposits.

“This is why, while hundreds of banks closed before 1960, with this amendment to the Banking Regulation Act, not a single commercial bank has been liquidated or closed,” he said, adding that ‘there was therefore no question of commercial banking. close. The AIBEA strongly felt that deposits from commercial banks and, above all, from public sector banks, do not need to be covered by the deposit insurance scheme, he said.

Boost for depositors

He pointed out that, year after year, public sector banks and all commercial banks were required to pay a huge premium to DICGC, but the claim rate was zero as there was no likelihood of liquidation. The letter from AIBEA pointed out that the claim settled so far, since 1962, was only 5,200 crore, and that also for the cooperative banks.

The AIBEA missive comes at a time when the government is seeking to increase deposit insurance coverage to ₹ 5 lakh from the current ₹ 1 lakh. The Lok Sabha is expected to consider the bill for adoption on Monday.

The AIBEA letter also highlighted the fact that of the 2,067 banks covered by the DICGC, the 1,923 cooperative banks were the only ones threatened with closure and their deposits need protection. Even in their case, the premium should only be charged up to the deposits covered by the insurance, rather than the total assessable deposits, which is much higher, the association said.


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Money creation

Reserve bank should curb money creation by commercial banks

Social Credit described the action of the Reserve Bank to curb its purchases of government bonds from private banks as a sensible and responsible decision.

At the same time, it must now curb the avalanche of money creation that has hit the commercial banks.

Failure to do so will allow inflationary pressures in the economy to continue to rise.

These commercial banks create an average of $ 20 billion in new money each year, and that amount has almost doubled in the past two years.

The ASB’s move to raise mortgage rates is just a cynical scam, preying on customers who have borrowed at the record-breaking interest rates offered by banks and will affect not only homeowners, but consumers. businesses, the very sector of the economy. which must retain staff and increase the production of goods and services to meet the demand of the economy.

ASB’s decision will be quickly followed by the other banks, all of which will be keen to increase their profits as well and will attempt to intimidate the Reserve Bank into raising the official exchange rate.

Any increase in Reserve Bank in OCR will simply drive up interest rates even further, add to already record profits for commercial banks, and worsen the effect on borrowers.

The Reserve Bank must determine who is in charge of the country’s financial system, itself or the commercial banks.

It should encourage banks to channel a greater proportion of their loans to the corporate sector, thus providing working capital for businesses to grow, invest in new technologies to overcome the labor shortage and increase the production.

Falling into the trap of rising interest rates will make the problem worse, leading to higher costs, reduced production, and hardship for businesses and homeowners.

© Scoop Media


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Money creation

What Libra Means For Money Creation

When Facebook announced its intention last June to issue a digital currency, Libra, the official industry was put on hold in its initial response. Central banks could not be seen as being too overtly unwelcoming to innovation and new ideas, but also, the concept hit quite directly the sovereign privilege of issuing money. They also worried in private about the possible consequences for their conduct of monetary policy *.

Since then, central banks have remained largely silent. The main news on Libra were the resignations of the consortium supporting the project; Visa, Mastercard, eBay and PayPal, among others, have ended their involvement. This stripped the project of a lot of payments systems expertise, and while Facebook has found other companies to take its place, the consortium is now less balanced and much more clearly a Facebook-dominated operation.

But the authorities’ silence does not mean that they have ignored the subject or overcome their initial mistrust. Much research on digital currencies continues to be done by the central banking fraternity, and two issues in particular arise.

The first of these is the effect on the Orthodox banking system, in particular its role in the creation of money. In a split banking system, banks are able to grant loans (i.e. create money) that are a multiple of their deposits, keeping only a small portion of their balance sheet in assets. liquids such as central bank reserves. This process allows the money supply to expand and, in any modern economy, is a critical contributor to economic activity and growth.

But if digital currencies become an important part of the economy, that money creation will be halted. Calibra – the Facebook subsidiary that develops Libra – has made it clear that it has no intention of offering loans or overdrafts, as that will immediately make it a bank and therefore subject to banking regulation. But it does mean that any money customers take out of banks to place in their Libra accounts will be wiped out not only from banks’ balance sheets, but from the money creation process as well.

Indeed, the introduction of Libra threatens to split the banking sector’s currently unified balance sheet, shifting a significant proportion of customer deposits (i.e. banking system liabilities) to digital money issuers. , while leaving loans and overdrafts customers (the bank’s system assets) with the banks. The inevitable result would be to force banks to reduce the assets on their balance sheets to match the reduced liabilities, that is, to reduce their loans.

This would almost certainly lead to a significant credit crunch, which would be very damaging to economic activity. The threat that “narrow bank” (non-lending) digital institutions could reduce or even replace the role of existing commercial banks is of deep concern to central bankers. There is no precedent for a prosperous modern economy without commercial banks and their role in money creation.

Unfortunately, central banks don’t have an easy answer to this. Relaxing banks’ reserve requirements and allowing banks to offer more loans per unit of deposit would allow them to maintain the same volume of loans despite the reduction in their deposits, but would weaken banks and risk bank insolvency in the event of a loss. economic downturn. Alternatively, central banks could issue loans themselves directly (or guarantee bank loans, which would have a similar effect by removing the need to build up reserves against them) – but this direct involvement in the economy of the private sector is even less attractive to them. Not only would such a move run counter to all existing central bank theories, but in purely practical terms, it would open up the central bank to much more direct contact with the general public and therefore, almost inevitably, to oversight. much more political. No central banker enthusiastically envisions getting drawn into the world of the “three Cs” – customers, complaints and call centers.

The second issue that arises from the introduction of private sector digital currency is that of cost. Libra and any other digital currency rival will need a revenue stream to pay their costs (and provide feedback to consortium partners). How are they going to increase this income?

If they can’t generate an income stream from paid loans and overdrafts, they must come from user fees. In principle, these charges will be levied on the commercial service provider, not the retail consumer, but in practice they will inevitably be paid by the consumer in the end.

This raises important questions of efficiency and value for money. It is by no means clear that such a private sector payment system would cost less to operate than the existing banking system, even on the narrow point of cost per transaction, especially if, as seems likely, a currency digital quickly becomes dominant for the exclusion of competitors. But there is the larger question of whether society is benefiting from big tech that takes even more money out of the economy into an unaccountable, tax-free and often overseas giant.

The current trials of Libra may mean that its introduction has been delayed. Many consider it to be in no way guaranteed to work. But central banks are well aware that even if Facebook fails to make its plan a reality, sooner or later someone else will succeed and introduce a private sector digital payment system. And the problems and implications for the central bank, the commercial banking system, and the wider economy that their current research has highlighted will not go away.

John Nugée, former Managing Director of Reserves at the Bank of England, is Senior Advisor to OMFIF. This is an abridged version of an article published by Laburnum Consulting.

* See http://laburnum-consulting.co.uk/facebook-enters-the-digital-currency-world/ for a more detailed discussion of the initial reaction of central banks to Facebook’s announcement.

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Money creation

What Libra Means For Money Creation

When Facebook announced its intention last June to issue a digital currency, Libra, the official industry was put on hold in its initial response. Central banks could not be seen as being too overtly unwelcoming to innovation and new ideas, but also, the concept hit quite directly the sovereign privilege of issuing money. They also worried in private about the possible consequences for their conduct of monetary policy *.

Since then, central banks have remained largely silent. The main news on Libra were the resignations of the consortium supporting the project; Visa, Mastercard, eBay and PayPal, among others, have ended their involvement. This stripped the project of a lot of payments systems expertise, and while Facebook has found other companies to take its place, the consortium is now less balanced and much more clearly a Facebook-dominated operation.

But the authorities’ silence does not mean that they have ignored the subject or overcome their initial mistrust. Much research on digital currencies continues to be done by the central banking fraternity, and two issues in particular arise.

The first of these is the effect on the Orthodox banking system, in particular its role in the creation of money. In a split banking system, banks are able to grant loans (i.e. create money) that are a multiple of their deposits, keeping only a small portion of their balance sheet in assets. liquids such as central bank reserves. This process allows the money supply to expand and, in any modern economy, is a critical contributor to economic activity and growth.

But if digital currencies become an important part of the economy, that money creation will be halted. Calibra – the Facebook subsidiary that develops Libra – has made it clear that it has no intention of offering loans or overdrafts, as that will immediately make it a bank and therefore subject to banking regulation. But it does mean that any money customers take out of banks to place in their Libra accounts will be wiped out not only from banks’ balance sheets, but from the money creation process as well.

Indeed, the introduction of Libra threatens to split the banking sector’s currently unified balance sheet, shifting a significant proportion of customer deposits (i.e. banking system liabilities) to digital money issuers. , while leaving loans and overdrafts customers (the bank’s system assets) with the banks. The inevitable result would be to force banks to reduce the assets on their balance sheets to match the reduced liabilities, that is, to reduce their loans.

This would almost certainly lead to a significant credit crunch, which would be very damaging to economic activity. The threat that “narrow bank” (non-lending) digital institutions could reduce or even replace the role of existing commercial banks is of deep concern to central bankers. There is no precedent for a prosperous modern economy without commercial banks and their role in money creation.

Unfortunately, central banks don’t have an easy answer to this. Relaxing banks’ reserve requirements and allowing banks to offer more loans per unit of deposit would allow them to maintain the same volume of loans despite the reduction in their deposits, but would weaken banks and risk bank insolvency in the event of a loss. economic downturn. Alternatively, central banks could issue loans themselves directly (or guarantee loans from banks, which would have a similar effect by removing the need to build up reserves against them) – but this direct involvement in the economy of the private sector is even less attractive to them. Not only would such a move run counter to all existing central bank theories, but in pure practical terms, it would open up the central bank to much more direct contact with the general public and therefore, almost inevitably, to oversight. much more political. No central banker enthusiastically envisions getting drawn into the world of the “three Cs” – customers, complaints and call centers.

The second issue that arises from the introduction of private sector digital currency is that of cost. Libra and any other digital currency rival will need a revenue stream to pay their costs (and provide feedback to consortium partners). How are they going to increase this income?

If they can’t generate an income stream from paid loans and overdrafts, they must come from user fees. In principle, these charges will be levied on the commercial service provider, not the retail consumer, but in practice they will inevitably be paid by the consumer in the end.

This raises important questions of efficiency and value for money. It is by no means clear that such a private sector payment system would cost less to operate than the existing banking system, even on the narrow point of cost per transaction, especially if, as seems likely, a currency digital quickly becomes dominant for the exclusion of competitors. But there is the larger question of whether society is benefiting from big tech that takes even more money out of the economy into an unaccountable, tax-free and often overseas giant.

The current trials of Libra may mean that its introduction has been delayed. Many consider it to be in no way guaranteed to work. But central banks are well aware that even if Facebook fails to make its plan a reality, sooner or later someone else will succeed and introduce a private sector digital payment system. And the problems and implications for the central bank, the commercial banking system, and the wider economy that their current research has highlighted will not go away.

John Nugée, former Managing Director of Reserves at the Bank of England, is Senior Advisor to OMFIF. This is an abridged version of an article published by Laburnum Consulting.

* See http://laburnum-consulting.co.uk/facebook-enters-the-digital-currency-world/ for a more detailed discussion of the initial reaction of central banks to Facebook’s announcement.

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Money creation

Money creation in fiat and digital money systems

Money creation in fiat and digital money systems

Author / Publisher:

Marco Gross; Christoph Siebenbrunner

Publication date:

December 20, 2019

Electronic access:

Free download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: IMF Working Papers describe ongoing research by the author (s) and are published to elicit commentary and encourage debate. The views expressed in IMF Working Papers are those of the authors and do not necessarily represent those of the IMF, its Executive Board or its management.

Summary:

To support the understanding that issuing debt by banks means creating money, while intermediary lending from centralized nonbank financial institutions and decentralized bond markets does not, the paper aims to convey two related points: Loan creation is compatible with the notion of liquid financing needs in a multi-bank system, in which transfers of liquid funds (reserves) between banks occur naturally. Second, monetary policy based on interest rates affects macroeconomic dynamics precisely because of this multi-bank structure. It would lose its impact in the hypothetical case of only one commercial bank (“singular”). We link our discussion to the emergence and design of central bank digital currencies (CBDCs), with particular emphasis on how loans would be made in a CBDC world.


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